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So, I am not a big spender. I have some investment in stocks and focus on monthly savings and don’t usually splurge money.

That said, I don’t know if I am doing enough to save enough money for retirement.

Mostly I am trying to answer the following:

  1. Assuming I live the lifestyle I have today after retirement and I live till 85 years, how much money do I need to save before I retire?
  2. I have read about the 4% rule. It seems it assumes that investments usually have a 5-6% return. Is that true? How do I measure that for my investments?
  3. Currently I am working a job that I would say is “reasonably safe”. However, I would like to switch my job roles a little bit to companies with a little more challenge but also more financial risk. Before I do that I want to make sure I’ve saved decent so that I don’t have to financially worry if things go bad for a few years. How many more years do I need to be in this “reasonably safe” job before I do that switch?
  4. Should I get a retirement advisor? I talked to fidelity once but they wanted to continually manage my investments. But initially I am just looking for basic advice.
Chris W. Rea
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user855
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  • Without some more information only very generic guidance will be available. How old are you, are you married / with kids / do you plan on either, do you have any financial goals between now and retirement (pay for kids' college, buy a cottage, etc.), how will your lifestyle change between now and retirement, how much do you have saved already, what pensions are available to you (either through your country's pension system, or your company's, etc.), how much do you spend now, how much do you earn now, where do you live and are you maximizing tax benefits of retirement plans, etc. etc. – Grade 'Eh' Bacon Jun 19 '20 at 15:41
  • I don't know that anyone has ever looked back from retirement and said they saved too much. – spuck Jun 19 '20 at 16:03
  • Does this question help? https://money.stackexchange.com/questions/14036/one-should-save-about-15-of-their-income-for-retirement-what-assumptions-are?rq=1 – spuck Jun 19 '20 at 16:04

2 Answers2

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  1. Based on historical data, you need to save around 30 to 35 times your annual expense and invest it appropriately to become financially independent. You can do this either by cutting your expenses or increasing your income. If you wanted to be extra safe, make this factor 40.

  2. Historically, the equity premium has been 6%. That is, equities have yielded roughly 6% more than the risk-free rate. I just checked that the S&P 500 index fund SPY returned 6.6% per annum over the last 24 years not counting dividends. The broker will generally issue a statement on which your return will be stated for different time periods.

  3. It depends on the risk involved in the new job, your preparedness for the new job, your annual expense, and how many years you expect to be unemployed if things do not work out. If you can provide the numbers in the comments I can give you an estimate.

  4. Just gather information from disparate sources such as these and then decide what you want to do. If you invest a reasonably large portion of your assets in an index fund in a systematic, periodic manner with a small chunk invested in every period, you will generally tend to do well over the long run. But there are no guarantees because past history is no assurance of future performance.

user2371765
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  • Thanks for the thorough answer! Much appreciated!

    Here's some more info:

    1. Family with 1 kid (2 years old)
    2. Annual Expense 84k-120k
    3. Years remain unemployed if things don't work out - 1 year
    4. Will need to pay for kids education including undergraduate college
     – user855 Jun 19 '20 at 23:01
  • "with a small chunk invested in every period" ... How do I get compounded growth? – user855 Jun 19 '20 at 23:09
  • If you expect to remain unemployed for one year should things not work out in the new place for you, just have 120 K in reserve since your annual expense is conservatively that amount. As for the education expense, which country are you in? If the cost of undergraduate education now is x, and education inflation is y%, the cost in nominal currency 15 years later is x(1+y/100)^15. Discount it by the nominal rate of interest z to get E= x(1+y/100)^15/(1+z/100)^15 to get an estimate. If z increases, as it usually does for stocks over the long run E will decrease .. – user2371765 Jun 20 '20 at 02:39
  • You get compounded growth automatically if you invest in the way the way that I have indicated. For example, if you start with $100 one year and if the rate of return is 5% one later you have $105. In the second year the rate of return applies on $105. This is compounded growth and it ensues automatically unless you withdraw the $5 of return from your account. – user2371765 Jun 20 '20 at 02:42
  • How does compounding apply to stocks? I didn’t understand that part. Let’s say I bought 10 stocks of Google. How much money I have after 5 years for example, essentially just depends on the value of Google stock after 5 years right? Are you talking about ETFs? I can understand how compounding applies to savings accounts or CDs. – user855 Jun 20 '20 at 04:26
  • Compounding is when the rate of return at any instant applies to the current account value. Will that not happen to an account containing stocks? Simple interest is when the rate of interest applies to the original account value period after period. – user2371765 Jun 20 '20 at 04:28
  • Compounding is with respect to the account value and not with respect to the asset you hold in it. You can hold Google or cash or anything else you want. So long as the rate of return at any given instant applies to the current account value you have compounding. – user2371765 Jun 20 '20 at 04:35
  • Sorry for being dumb. Continuing with the Google example - if I bought 10 stocks at $50/stock and 5 years later it is $55/stock, what is my rate of return? 10% correct? Lets say 5 more years later, the price drops to $50/stock. What is my rate of return? 0% I think. Correct? That means my rate of return dropped from 10% to 0% and I might just lose my money post retirement.

    IIUC, you seem to be stating that "Growth" compounded is guaranteed. I can see it is guaranteed for a savings account. I fail to see how Growth is guaranteed for Stocks.

    Is Growth guaranteed for ETFs and Stocks?

     – user855 Jun 20 '20 at 06:11
  • Where did I say it is guaranteed? In fact, I wrote in my answer that there is no guarantee of returns in the stock market - neither for stocks nor for ETFs. But there is a good chance that you will make positive returns on ETFs over the long run because they are well-diversified and businesses tend to grow over the long run. Compounding does not mean guaranteed returns - only that the rate of return at a given instant applies to the current value of the account. Your google scenario might happen, but the chance of that happening for an ETF of which google is a constituent is relatively less. – user2371765 Jun 20 '20 at 06:32
  • Savings accounts have guaranteed nominal returns. Inflation will eat away a sizeable portion of those returns. Equities generally tend to beat inflation over the long run. – user2371765 Jun 20 '20 at 06:33
  • Ah! makes sense. How do I find out what are the good ETFs to invest it? – user855 Jun 20 '20 at 06:41
  • SPY is an ETF that emulates the performance of the S and P 500 index. It will give you the market return. There are sector ETFs that focus on certain sectors. You can find out about ETFs online or on the websites of financial institutions such as Fidelity or Vanguard. – user2371765 Jun 20 '20 at 06:49
  • Let us continue this discussion in chat. – user855 Jun 20 '20 at 14:07
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No on the retirement advisor. I don't know what the fee structure of Fidelity is, but with Wells Fargo Advisors, a managed account costs something like 1% per year. That's not 1% of the return, but 1% of everything under management (so depending on assets, you could be paying thousands per year in just fees). And you pay those fees even in a downturn, so the advisor makes $$$ while you're losing it. And to boot he simply would've used some portfolios from MorningStar. You could do they exact same thing by getting the portfolio weights from MorningStar yourself, or just buying various index or ETF funds (I like Vanguard, and SPY)

DanCo89
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